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Analysis: What are green taxes, could they be scrapped, and what would the effect be

The government is going to “roll back some of the green regulations and charges that are putting up bills”, according to David Cameron.

Cameron announced a review of “green energy taxes” at today’s Prime Minister’s Question Time. But what exactly does he mean – and what might be the effect of his announcement?

What are ‘green energy taxes’?

The phrase ‘green taxes’ is commonly used to refer to a package of government measures intended to encourage expansion of low-carbon power, subsidise home insulation and tackle fuel poverty. The measures are paid for via levies on consumer energy bills.

Not all of the measures have environmental aims. The Warm Homes Discount, for example, provides low-income consumers with a discount on their energy bills, and is purely a social measure.

Renewables Obligation and Feed in Tariffs – these are subsidies for renewable power.

EU Emissions Trading Scheme (ETS) – this is a tax on the production of fossil fuels introduced at the European Union level.

Carbon Price Floor (CPF) – this is a top-up tax to the ETS, introduced unilaterally by the UK government. It sets a ‘floor’ on the carbon price under the ETS. Revenues raised go straight into government coffers, rather than paying for any particular social or environmental policy.

Warm Homes Discount – this is a subsidy to help low-income household pay their energy bills.

How much do they add to an average energy bill?

Ofgem estimated at the end of 2012 that the levies added about Â£107 to consumer bills – making up eight per cent of an average 2012 annual bill.

The Department for Energy and Climate Change (DECC) set the figure slightly higher in March 2013. It suggested the levies accounted for Â£112, or nine per cent of an average bill. Here’s DECC’s breakdown of what that looks like:

These figures are slightly out of date and don’t account for recent price rises. Energy companies imply the measures could add up to another Â£50 to bills over the next twelve months.

Government advisor the Committee on Climate Change (CCC) disagrees. It says the measures will only add another Â£10 to bills over the next year.

Ed Davey, the Liberal Democrat energy minister, has accused energy companies of talking up the costs of some of the measures.

What would cutting these charges do – immediately?

Hypothetically, cutting all of the measures would take about Â£110 off the average energy bill of Â£1320 immediately, and would be politically popular in some quarters.

But it could be difficult to put into practice. The Emissions Trading Scheme (ETS), for example, has been created at a European level, and it would be hard for the UK to withdraw while the country is a member of the European Union.

The government has just finished going through an extended process of putting in place new low-carbon support policies under the Energy Bill, which is currently going through the House of Lords. Suddenly withdrawing all support for renewables would throw the government’s long fought over energy policy into disarray, and presumably threaten investment in the energy industry as well.

Because of these challenges, Tories have turned their attention to two measures which might feasibly be cut or delayed. According to the Sunday Telegraph, the Energy Company Obligation and the Carbon Price Floor are in the firing line.

Cutting these measures could take about Â£50 off bills – in the short term.

Would this solve the problem of rising bills?

The media and energy companies have focused attention on the role of government levies in pushing up bills.

Over the last ten years, wholesale electricity costs have risen by around 140 per cent, accounting for 60 per cent of the rise in household energy bills between 2010 and 2012, The Department for Energy and Climate Change (DECC) estimates.

Ed Davey argued just last week that it’s ” impossible” for politicians to solve the problem of rising energy bills, because they can’t control the costs of wholesale energy.

If gas prices carry on rising, the more reliant the UK is on gas, the more we’ll pay for energy.

If the future holds high gas prices, cutting green measures could end up being counter-productive. That’s because one aim of government subsidies for low-carbon power and energy efficiency is to reduce the country’s future dependence on gas imports.

Cutting back on subsidies for home insulation would also limit the government’s plans for tackling fuel poverty – an area where it has already been criticised for failing to hit targets.

Why is this debate happening now?

All of these arguments have been rolling along for some time – ever since the Daily Mail decided to turn its fire on ‘green taxes’ back in June 2011.

But it became more politically significant when Ed Milband’s proposal at the Labour Party conference to impose a temporary freeze on household energy bills attracted popular support.

Labour’s move is widely perceived to have put the Conservatives onto the back foot, and has certainly catapulted energy policy to the very centre of the political debate.

In recent weeks energy companies have announced significant price increases, often laying the blame on government levies. It’s been headline news, creating more pressure on politicians.

Cameron’s suggestion today that by cutting the levies government could bring down consumer bills is a response to that pressure. But it may also reflect political infighting between coalition partners – the Liberal Democrats have been very supportive of the government’s green agenda.